Non-Rehypothecation is a financial principle where a custodian or broker is legally prohibited from reusing or lending out a client’s assets. This ensures that the client’s assets remain segregated and are not subject to the custodian’s own financial risks. In the digital asset space, it provides a higher degree of security and client protection. It helps prevent scenarios where client funds are commingled or exposed to counterparty insolvency.
Context
The concept of non-rehypothecation has gained significant prominence in the digital asset industry following instances of platform insolvencies. News reports frequently discuss the importance of segregated client accounts and the risks associated with rehypothecation practices in crypto lending. Regulatory bodies are increasingly considering mandates for non-rehypothecation to enhance investor confidence and market stability.
The SEC Staff's no-action relief provides a critical, compliant pathway for Registered Investment Advisers to custody client digital assets via state-chartered trusts.
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